A new paradigm for economic sustainability

Governments the world over are faced with the challenge of a growing imbalance between public spending and revenues.

For decades, the Cayman Islands government enjoyed surplus budgets with large amounts of public spending, thanks mainly to the successes of its financial services industry.

The 2008 global economic crisis and significantly reduced government revenues suddenly and dramatically changed all of that, and soon the Cayman Islands government was faced with the same dilemma as most other countries around the world: how to manage the gap between decreasing revenues and growing public expenditures for government services and benefits.

Most other governments in the world have the ability to increase revenue through direct taxation of wages, profits, land holdings and other assets. Although the Cayman Islands does have indirect forms of taxation, it has so far resisted the implementation of income, payroll or property tax, even though there have been suggestions from the United Kingdom to do so.

The Cayman Islands government has managed to eke out an acceptable budget the past two years by increasing some business fees and import duties, while at the same time curtailing spending. But no one believes this solution is sustainable in the long run – public service has suffered, the cost of the civil service remains disproportionately high and the revenues are not growing apace with higher expectations for social benefits and funding.

Moreover, these important local priorities can inadvertently distract from the global issues and negatively affect Cayman’s competitiveness as a jurisdiction if not corrected.

I am reminded of an article entitled “Red Ink Rising” published by Deloitte. (See http://www.deloitte.com/redinkrising). These problems are common to local, state and national governments around the world. The historical approach of waiting out, assuming that the problem is cyclical and will correct itself when good economic times return is obsolete. Most analysts agree the world’s economic model has fundamentally changed as a result of the latest global recession and the new imperative is for change.

Public finance structures must change if governments are going to cope with the new reality.

Change can be very difficult, especially when it comes to well-entrenched government practices and cultural social expectations, but change we must. The Cayman Islands can no longer rely on revenue projections based on expected performance of a financial services industry, which is facing increasing political and regulatory pressures from the world’s economic watchdogs.

The solution is both resetting expectations and finding new funding solutions. Innovation and prudent private sector partnerships can allow us to reframe our public expenditures and create a new economic paradigm without introducing direct taxation. It appears the Cayman Islands government is trying to move in this direction.

In June, it announced an agreement reached with the Dart Group that on the face of it represents a true strategic public/private partnership that offers many benefits to each party, as well as to those who live, visit or invest in the Cayman Islands.

Over the next three years, the Dart Group will fund more than $100 million for needed infrastructure and social programmes, something it would take the government years or even decades to accomplish without massive – and ill-advised – borrowing. In return, the Dart Group received a commitment to deliver a number of development incentives – from resolution of the George Town landfill, duty waivers and other fee concessions, land swaps and certain other legal reform. This agreement has created the confidence level Dart needed to investment another $415 million over the next five years, something that will create tens of millions of dollars more in indirect economic impact during the same timeframe.

This partnership alone will create hundreds of jobs and tens of millions of dollars in government revenue and is exactly the type and scale of economic stimulus the Cayman economy needed to revitalise the local economy.

Now strongly joined in a strategic partnership for prosperity, the Dart Group anticipates spending more than $1.2 billion in the Cayman Islands over the next 20 year while developing hotels and other commercial space, as well as a variety of housing options.

The government’s efforts to change the paradigm don’t stop there. A number of other public/private initiatives are being discussed, from the privatisation of certain government functions or entities, to innovative solutions for other infrastructure needs.

The government is also discussing projects that would diversify Cayman’s economy. Cayman Enterprise City, a special economic zone specialising in technology, could lure some of the world’s top hi-tech companies here, Dr. Devi Shetty’s Narayana Cayman University Medical Centre could give the tourism sector an new sector with medical tourism and the East End Seaport could create new industry here with cargo transhipment and cruise ship home berthing.

This is the kind of innovative, out-of-the-box thinking the Cayman government must do if it is to have confidence that it can balance its budget every year while at the same time providing the level of service its residents and investors demand, and the compassionate assistance its less fortunate citizens need.

The financial crisis was a wake-up call for every government and we’re proud to say the Cayman Islands government has risen to the challenge as it embarks to create a model that will ensure its economic sustainability now and for decades to come.

The private sector also has to pursue new opportunities to drive the Islands’ growth. One of the regions that has been identified by the investment funds and trusts sector in particular is Latin America. As Latin and South American countries increase their weight within the global economy, the more important the Cayman Islands becomes as a facilitator for investment into and from the region. Specifically Brazil, South America’s economic powerhouse, has strong relationships with the Cayman Islands in terms of investment structures, banking and the use of trusts, which this issue of the Cayman Financial Review investigates.

This is complemented by a sub-focus on trusts that highlights topics as diverse as the role of STAR trusts amid the latest philanthropic trends, the tax and reporting requirements of United States taxpayers with interests in foreign trusts and the most pertinent accounting issues faced by trustees.

In addition this issue of the CFR provides once again the answers to a number of questions from across the financial services spectrum, including how a hedge fund should be run from a revenue and cost perspective and how retail banks can best leverage customer information and social media.

Pilar Bush is the managing director of AtWater Ltd., a consulting firm which provides strategic advisory services. She has more than 15 years’ professional experience in tourism, aviation, government and has a BA in Economics and an MBA. She was Director of Tourism for the Cayman Islands (2005-2008) and while based in New York, the Deputy Director responsible for Marketing (2001-2004). She is also EVP of Marketing and Communications at Dart Realty and Dart Enterprises.

Other career highlights include VPMarketing & Corporate Planning for Cayman Airways and an Asst.Permanent Secretary in the CI Government with responsibility for planning (land planning and development). She has served on the Board of Directors of the Caribbean Tourism Organisation (CTO), Chair of the CTO’s Sustainable Tourism Technical Committee, Cayman Airways Board of Directors, the Hotels Licensing Board and on various tourism, change management and marketing committees.

AtWater

Founded by Pilar Bush, AtWater Consulting Ltd. provides advisory and
operations services to industries, organisations and individuals in the
areas of strategy formulation, business development, project management
and marketing communications.